Taxation generally has two purposes-raising government revenue and satisfying social goals. There are three general categories of taxes: income, excise, and transaction, although excise taxes might be considered a type of transactional tax. Current transactional taxes are predominately flat-rate taxes. Flat-rate taxes are variously perceived as being simple (one rate, easy to calculate), and/or unfair (those who are unable to save pay a larger portion of disposable income than those who are able to save). The latter argument is generally addressed by exemptions from taxation; for example, by exempting basic necessities. Other exemptions, such as those for farm use items or for non-profit organizations, are instituted to meet social objectives.
Transactionaltaxes are increasingly favored for three reasons. First they are a step in departure away from the "honor plus audit" system used for income taxes. While transactionaltaxes can still be under-reported and underpaid, the system as a whole is perceived as "less leaky," since taxes are collected and remitted by a smaller number of entities, and these entities have more to lose by subverting the system. Second, the transactional system as a whole is perceived as simpler and more manageable because it is collected at the point of activity. The administrative burden for the system is concentrated at the business entity level, which is equipped to handle such a burden. Finally, transactional taxes can be increased fairly easily compared to income taxes. Since transactional taxes are levied on a large base of activity, a small rate increase produces great impact. Income tax rates are already perceived to be high, and so tax increases are generally achieved by tuning exemptions, deductions and the like, a much more complicated process.
The most common transactional tax is sales tax, levied on the purchaser of a non-exempt item, and collected by the seller at the point of sale. Sales taxes can be levied on both goods and services. The taxing authority defines the mix of exempt and non-exempt transactions to meet goals of equity and social policy.
Taxing authorities, such as states in the U.S., require that every business conducting transactions be licensed or permitted, and usually charge a fee for the right to conduct transactions. Each business is supplied with information about their responsibility to collect and remit the tax, and the procedure for doing so. Businesses are required to maintain an "audit trail" that documents each individual transaction, including whether the item sold was exempt or non-exempt and the amount and date of the transaction.
In addition to maintaining transaction-level information, each business is responsible for summarizing this information periodically, reporting it to the State, and remitting the corresponding tax revenue.
Perhaps the primary drawback of flat-rate transactional taxes is the lack of a flexible mechanism in their application to individual circumstances. The very simplicity that makes them administratively desirable has made them socially troublesome. This has been an impediment in instituting a U.S. transactional tax system, and has discouraged the states from relying on sales taxes more heavily.
One of the presumed benefits of a progressive income tax system is the ability to distribute more of the responsibility for government's cost on those more able to pay. This same progressive nature could be beneficial in a sales tax, assessing higher rates for higher cumulative purchases over some time period. However, since there has been no acceptable mechanism to accumulate an individual's purchases during a given time period, such a system has been impractical. Implementing such a system based on current infrastructure technology would be burdensome and error prone. Further, any such system that did not have built-in security of identity would be subject to easy manipulation by those desiring to minimize their transactional tax rate.
Therefore, a need has arisen for a transactional tax system which does not have to rely on a flat rate. A further need exists for a transactional tax system which can be progressive. A further need exists for transactional tax system which can have the flexibility to adjust for individual circumstances. A further need exists for transactional tax system which can have the flexibility to adjust for socially desirable goals. A further need exists for transactional tax system which, while it can be used progressively or otherwise achieve socially desirable goals, is still accurate and simple to operate. A further need exists for a transactional tax system which is tamper resistant. A further need exists for a transactional tax system which does not compromise the privacy of the individual.